Haircuts on sovereign debt ‘open the door for more leverage’, research finds
Prolonged low interest rates also contribute to an overleveraged economy in case of crisis
Haircuts on sovereign debt, despite reducing fiscal constraints, "open the door for more leverage", a working paper published by the Central Bank of Brazil suggests.
In Bargained Haircuts and Debt Policy Implications, Aloisio Araujo, Marcia Leon and Rafael Santos discuss the effects of a "popular supportive policy" in the aftermath of a sovereign crisis – haircuts resulting from debt negotiation.
The authors argue "expectations of haircuts in case of crisis" combined with prolonged low interest
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